Can You Carry Forward Losses On An Property Investment That Was A Main Residency

Q&A Tax

Question :

Mr. and Mrs. Smith bought a house in 2004 and had been living in there until 2013 when it became a
rental property. During the time they were living in the house, they both treated the house as their
main residence. They obtained a market valuation at that time when they started to rent out the
house.

In 2018, they sold the property for a significant amount less than the market valuation. Thus, a capital
loss is made.

Is the client entitled to carry forward this loss to claim against future capital gains?

 

Answer :

As a general rule, a dwelling ceases being your main residence once you stop living in it. However, you
can choose to continue treating a dwelling as your main residence for capital gains tax (CGT) purposes
even though you no longer live in it.

Generally, you can treat the dwelling as your main residence for:

• up to six years if it is used to produce income
• indefinitely if it is not used to produce income

In this case, if Mr. and Mrs Smith chose to apply this rule, the capital loss arising from the sale of the
house after renting our for six years (2013- 2018) is disregarded.

Alternatively, they can choose not to apply the 6-year absence rule in s118-145 so that the house would
cease to be their main residence in 2013 which is the moment they moved out.

Accordingly, the sale of the house would be subject to CGT. The cost base of the property would be
reset to its market value in 2013 when it was first used for income producing purposes under s118-192.
If the sale of the property resulted in a capital loss, Mr. and Mrs. Smith can claim the capital loss and
carry it forward to later income years to offset future capital gains.

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